Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Looking Back on Black Monday, 30 Years Ago

It was the Dow’s worst single day ever. Will that record ever be broken?

In this segment from the MarketFoolery podcast, host Mac Greer, Total Income's Ron Gross, and Million Dollar Portfolio's Matt Argersinger reflect on the 1987 plunge in the stock market that had many investors fearing the worst.

We've learned a lot since then, and the market is very different, but the primary driver of that dive still exists on Wall Street now. So how should Foolish investors guard themselves against such bearish events? The Fools offer some advice.

A full transcript follows the video.

This video was recorded on Oct. 19, 2017.

Mac Greer: Let's start with Black Monday. Today is the 30th anniversary. October 19th, 1987, the single worst percentage drop in stock market history. The Dow fell 508 points, more than 22%. If you put that in today's terms, that would be around a 5,200 point drop in the Dow. Ron.

Ron Gross: Yeah.

Greer: You were around.

Gross: I was. I was certainly around.

Greer: I was right out of college, waiting tables, $2.01 an hour plus tips.

Gross: [laughs] Nice.

Greer: But I remember Black Monday.

Gross: Of course.

Greer: What's the takeaway for investors.

Gross: The takeaway, I think, is that these corrections are certainly going to happen. We know it, it's for certain. Now, will they happen this severely? This is the most severe, it's pointing at something and saying, that's the worst that we've seen. Will something like that happen again? Perhaps, but I think it's much less likely. First of all, the markets are different, we have circuit breakers in place that halt the market when certain dips happen to give everyone a breather. But I would say, the thing that worries me the most is, most folks blame that crash on computer trading, program traders that kicked in and exacerbated the problem. I think today, more than ever, we're so dependent on computers running the markets, and the quant traders out there and the algorithms. So, that does worry me. It could happen again. But, I tend to not think we will see something so extreme like a 20% down day.

Matt Argersinger: Yeah. Crashes are going to happen. We're going to have a market crash at some point. Whether it happens in a day like it did in 1987, or it happens over the course of several years, like we saw in 2000, 2002, or even in 2008, our recent experience. But the reasons for a crash are always different. There are a few lessons you can take from 1987. As Ron pointed out, the circumstances are so different, but I do agree with him, we are in a situation where, we had programmatic trading back then, but even today, the algorithms that are driving the market, the returns that you see in the stock market, are much more advanced and much more complex and much more prolific then we can ever imagine. We've never really had a test of that system. If all of the sudden, there was some kind of exogenous factor that hits the market, what happens to all these programs? Do they start kicking in? Do they start selling? All these ETFs, these dynamic ETFs that we have these days, are they going to start doing something and all go in unison and start selling the market? We don't know. All we know is, a crash is going to happen at some point.

Gross: I don't know what exogenous means, but if something from the outside were to occur -- no. I think something geopolitical could be the thing. It's always the thing you don't think of or you're not expecting. Something bad, from a terrorism perspective, a North Korean perspective, could be the shock we need, because valuations are stretched. Interest rates are going to rise. We're kind of ripe for something exogenous to come in and take a swipe at us. But, if we get a 5% correction, that would take us back to August 18th. Was everyone OK on August 18th?

Greer: I was pretty good. About to go to the beach.

Gross: It was my sister's birthday, it was fine. If we get a 15% correction, we're back to the beginning of the year. That was fine, too. We were pretty good.

Argersinger: Felt good.

Gross: So, I don't think it's something we should be worried about or losing sleep over.

Greer: As we wrap this up, if I'm an investor, to your point, Ron, what are some things I can be doing, maybe not prepare for the next crash, but, what are some questions I should be asking? Or, as I look at my portfolio, is there a way to stress test it? What can I do? It's one thing to say crashes happen, it's another thing to go through it and look at your portfolio and see what's happening.

Gross: For sure, make sure that the money you need over the next three years, or even five if you're conservative, is not invested in the stock market. That should help you sleep at night, and should make you portfolio battle-tested. Then, just look at your portfolio and say, is this what I want to be invested in? I'm a happy with the way I'm invested here? Most people don't necessarily have the time to do that on a weekly or monthly basis, occasionally, quarterly, even, take a look at your portfolio and make sure it fits your vision of the world, and make sure you stay safe and can sleep at night.

Argersinger: Yeah, agree with all that, and I would say, Mac, what we talked about before the show becomes even more relevant. Look at your portfolio. What companies are trading at high valuations that you look at and say, if something fundamentally happened, not just a market crash but maybe a recession or some kind of bad, more extended event, what companies are vulnerable? And what it comes down to is companies that are strong, companies that have great business models, great competitive advantages, those are companies that are not only going to survive a crash, but they're going to thrive and take market share from competitors coming out of it. When the tide goes out, though, a lot of the companies that have been swimming around in this glorious bull market we've had for going on nine years now, those are the ones that are very vulnerable. So, especially if you're worried about a crash, take a critical look at what companies you have and ask yourself, why do I own this? Do I own it because I believe it's a strong business? Do I own it because it's been this great momentum company that's doing all these great things, but I don't really understand it? That's when you might want to trim.

Gross: And do not panic. That's the one thing. Don't look at your brokerage statement every day, don't look at the Dow or the S&P, whatever your preferred index is, every day, if we get into some dark times. Just let it go, stay the course. If you have cash, put it back into the market at lower prices and don't panic.